[Week 49 of 2025] Property, Pensions, Passivity

Welcome back to Price and Prejudice with a few musings from Week 49 of 2025.

Office-to-Residential Alchemy

This WSJ piece on New York’s office-to-residential conversion boom helpfully reminds us that Manhattan has invented a new asset class: former offices, with enough notches carved out, can somehow become acceptable apartments. Of course this is a risky investment – a few risks that comes to mind are construction risk, vacancy risk, and the uncertainty associated with whether anyone actually wants to live in a former cubicle farm.

Another important aspect of this is that these projects only work if rents stay high and financing stays patient. Developers are effectively betting that $4,500 one-bedrooms are not a weird post-pandemic blip but the resting state of Manhattan housing. And while tax abatements help, they also invite the usual political questions about who’s subsidizing whom and for how long.

But the bigger wager is on New York itself: that demand for being in Manhattan is so durable you can recycle decades-old office stock into residential gold indefinitely. I mean, it’s not a crazy bet; the city has survived crime waves, recessions, and whatever Hudson Yards is. And as a New Yorker myself, I hope the bet is not a misplaced one.

Target-Date Mission Creep

This WSJ piece on target-date funds notes they’re drifting from “set it and forget it” toward “set it and hope nothing strange is hiding inside.” The incentive is obvious: trillions in steady, uncomplaining retirement dollars make it tempting to add more sleeves, more factors, and, eventually, more expensive illiquid things.

Collective Investment Trusts (CITs) – bank-regulated pools that look like mutual funds but disclose far less – sit at the center of this shift. The worry is that simplicity was the whole point. Once CITs start replacing mutual funds by bringing lighter disclosure and looser liquidity rules, you also create a convenient entry point for private equity to move into portfolios that were designed specifically so people wouldn’t tinker. Autopilot is less comforting when you’re not entirely sure what’s in the cargo hold.

Ultimately it’s a bet on investor inertia. Managers know target-date investors rarely look under the hood, and payroll contributions arrive on schedule no matter what’s happening in markets. We already saw in the SVB episode what happens when people suddenly “wake up”; it’d be interesting to see whether a similar moment ever comes for retirement savers. Markets run on trust, but they run even better on inattention.

Unusual Bond Playbook

This interview distills five lessons about the credit market, which is rapidly evolving – especially with the rise of private credit. Perhaps the most interesting one is lesson #3 that, borrowing the author's terminology, bond indexes are "built backward." The point is that bond indexes reward borrowing, which means the most indebted issuers get the biggest weights and benchmarked managers are forced to own them.

In that sense, bond indexes are a little bit cursed. Equity indexes are at least trying to do something that sounds vaguely sensible: “own a slice of the world’s productive capital in proportion to what the market thinks it’s worth.” The weights come from demand. Bonds are different. A bond index says: “own a slice of the world’s borrowing, in proportion to how much everyone has borrowed.” The weights come from supply.

Once you see it that way, “just own the index” feels very different in bonds than in stocks. Cap-weighted global equities are a reasonable shorthand for “own the world’s companies.” Cap-weighted global bonds are more like “own the world’s funding needs.” If you’re a long-horizon investor, that pushes you toward a simple, slightly boring view: take your risk in equities; use bonds mainly for safety and managing your interest-rate exposure.